Trade, Innovation and Growth

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The most active and exciting area in international economics currently consists of research like this project that synthesizes international trade theory and the theory of industrial organizations. This project develops models that allow consideration of the important dynamic issues that arise in the context of growth and development in an integrated world economy. A distinctive feature of the approach to these issues in comparison with earlier studies of international trade is the focus on the evolution of productivity change. Recent advances in the economics of research and development and learning-by-doing in markets with imperfect competition permit the construction of models in which innovation is endogenous to the model of international trade and not determined by factors outside the model. Case studies of post-war economic performance provide ample evidence of a systematic relationship between a country's trade regime and its long-run performance. For example, trade figures prominently in the Japanese success story. Yet existing trade theory predicts one-shot static effects of trade instead of the long-term dynamic regularities observed in the data. This project develops a dynamic theory that explains the empirical regularities and provides a basis for assessing competing explanations. This project contributes to our understanding of the link between trading opportunities, trade strategy, and economic growth. It also provides new and better explanations of dynamic processes in world trade identified by empirical researchers. This project addresses such important questions as: Do outward-looking, export-oriented less developed economies grow faster than those that concentrate instead on domestic markets? Does such a prescription hold for all points in time? And is welfare maximized by a policy of benign neglect or active promotion of exports? For the case of the industrially advanced countries, should industrial policies be used to promote domestic firms in their dynamic international competitions? How does trade policy influence the rate of technological innovation? What scope exists for international cooperation to maximize overall growth of the global economy?